As we noted in last month's Tax Letter, the recent Federal budget introduced a new children's arts tax credit. The credit is available starting this year. Although draft legislation to implement the credit had not yet been released as of mid-July 2011, the budget documents and a recent CRA notice have provided some details. The details of the credit are as follows.

The credit is 15% of up to $500 of eligible expenses incurred in the year for each child who is enrolled in a program of artistic, cultural, recreational or developmental activity ("eligible program"), and who is:

·under 16 years at the beginning of the year in which the expenses are paid; or·under 18 years at the beginning of the year in which the expenses are paid if the child is eligible for the disability tax credit.

Furthermore, if at least $100 in eligible expenses has been paid for a child eligible for the disability tax credit, an additional amount of 15% of $500 can be claimed for that child.Either parent may claim the credit, or it may be shared between parents.

Eligible program

An "eligible program" is either a program of at least 8 consecutive weeks in which a minimum of 90% of all the activities are "eligible activities", or a program (e.g. a camp) of at least 5 consecutive days in which more than 50% of the daily activities are eligible activities.

In terms of memberships, the full cost of a child's membership in a club, association or similar organization will be eligible for the credit if more than 50% of the activities offered to children by the organization include a significant amount of eligible activities. The CRA notes that the membership must be at least 8 weeks in duration.

A program that is part of a school curriculum is not an eligible program.

Eligible activity

For the above purposes, an "eligible activity" includes an activity that:

contributes to the development of creative skills or expertise in artistic or cultural activities; or

provides a substantial focus on wilderness and the natural environment; or

helps children develop and use particular intellectual skills; or

includes structured interaction among children where supervisors teach or help children develop interpersonal skills; or

provides enrichment or tutoring in academic subjects.

For disabled children, the budget documents state that eligible activities will include similar activities that have been adapted to accommodate the needs and abilities of a child who is eligible for the disability tax credit.

Eligible expenses

Eligible expenses include fees paid for the cost of registration or membership, which may include the program's costs of administration, instruction, the rental of facilities or equipment used in common, and incidental supplies.

The following are not eligible expenses:

Fees paid for the purchase or rental of equipment for the child's exclusive personal use (e.g. musical instruments);

Fees for travel, meals and accommodation;

Expenses that qualify for the purposes of the child care expense deduction or the children's fitness tax credit.

The organization offering the program will determine the amount of the fee that is eligible for the credit. The CRA states that parents should keep the receipts issued by the organization for verification purposes, although the receipts do not have to be filed with their tax returns.